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The press just lied to you about inflation
Britain’s inflation figures are massaged to keep us from knowing what’s really going on, says Bengt Saelensminde. Here, he explains why, and what it means for your investments.
Did you see the headlines yesterday? 'Consumers to benefit from falling inflation', 'Household spending given a boost', and all that sort of guff. What a load of rot.
Sure, with consumer prices reportedly up only 2.4% as opposed to 2.8% last month, at least we're not getting poorer quite as quickly as we were. But inflation means we're still paying more for stuff than last year. Prices are rising; they're certainly not falling, so how can there be any sort of claim that people will be better off?
Not only that, but the inflation figures are massaged and contrived so as not to make us all completely petrified of what's really going on.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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It's kind of obvious that consumer price inflation is bad for the average punter. Who likes rising prices, be they in food, energy, or anything? But then again, we're led to believe that rising stock prices are good news, rising house prices too, right?
But if we turn this all upside down, we should logically infer that falling stock prices are bad news (er, yes, so far so good); but moreover, falling consumer prices should be good news. "Ah, well, no" say the meddlers.
The line the planners peddle is that falling consumer prices are not good for us - they use the dreaded d-word' - deflation. Ever since the financial crisis of 2008, the Bank of England has said that it's on the case of deflation, it's thereby given itself the remit to print money to stymie this deflationary bogeyman. But if you think about it, deflation really would mean consumers could benefit it would allow consumers to spend more possibly it would be good for the economy too.
But no such luck. In Japan the public is duped by this deflation bogeyman thing too
Fighting deflation has led to a gush of yen from the central bank. As I reported a couple of weeks ago, the Japanese can now look forward to paying 20% more for a burger in downtown Tokyo. If I were them, I'd much rather take falling prices, thank you very much!
The truth is that whether inflation is good news or bad totally depends on who you are and where you stand. For people looking down the line at their retirement, inflation is just another thing nibbling away at their savings pot, as if taxes and fees weren't enough to worry about! If that's you, then your best bet is keeping costs down; it's the thing you have most control over when you invest for retirement.
Of course there are ways to profit from inflation itself. Let me explain.
The new key to investing: follow the hot money
Inflation is a measure of the growth in money supply - or at least, that's its real meaning. Inflation figures quoted in the press have a different meaning - it's the price rise of a standardised shopping basket. The planners like to push the shopping basket definition, because so long as the reported inflation doesn't go up too much, they can print and spend and forget all about the long term consequences of what I'd call real' inflation.
But if we pursue the actual definition of inflation (you know, the rising money supply one), we'll see things more clearly.
Now, there are only really two ways of creating money. First, central bank creation quantitative easing (QE), and secondly credit creation (or new loans). The beauty of being the creator is that you can decide where that new money goes. Money is power, after all. That's why the central planners love QE and increasing government debt, both of these things give the planners money and therefore power.
The biggest winners from money creation are the ones that receive the money first. Create a load of money and give it to a bank - then the bank's the winner.
Likewise, get a mortgage on a new-build home and give the cash to a builder, then the builder's the winner.
With the benefit of hindsight, I've got to admit, I take my hat off to Warren Buffett. Right at the depths of the crisis in 2008, he had the foresight and fortitude to back the then ailing Goldman Sachs. He met its cash call and ponied up big bucks for Goldman's preference shares and equity warrants. I guess he had a suspicion that the government would print more money and bail out the banks he followed the money creation and made fortunes on the deal.
And closer to home, it was spring last year when the planners started pumping serious cash into the UK housing sector. Schemes like funding for lending, as well as budgetary considerations from George Osborne, primed the housing sector.
Here's a chart of the home construction and household goods sector to illustrate what happened.
Source: Digital Look
The FTSE has also done well over the same period, but the fact is that the builders have outperformed by double.
So for anyone that says we're not seeing serious inflation; I put it to you that we are. It's just that it's not especially prevalent in your standard shopping basket. But if you look at the FTSE and house prices that's where you see inflation.
Ultimately, the cash tends to filter through the economy and results in higher prices on the high street too but the way it happens isn't always easy to predict.
I mean, at one point we were seeing massive commodities price inflation - energy, foods and key industrial components. But that's all come off the boil right now. Bonds have had a fantastic money printing induced run but it now seems the yellow jersey is with team equity; as we know, that's the place to be right now.
In many ways, the art of investing today comes down to predicting hot money flows,
If you can do that, at least you give yourself a fighting chance of benefitting from inflation.
I'm sticking with stocks for now this part of the inflation cycle could be with us for months and even years. But I'm keeping an open mind as to where the hot money flows next. Maybe back to commodities? Let's keep an eye out for some signals.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
